When the US Department of Justice prosecutes a company for corporate misconduct, it often imposes costs on some stakeholders, such as employees and pension funds, who had little or nothing to do with the company’s bad behavior. Federal authorities, therefore, might seek an alternative to traditional prosecution for bringing a business back in line: appointing a corporate monitor who can investigate the wrongdoing and set the company up for future compliance.
DOJ policy on monitors has fluctuated over the years, with internal memos encouraging or discouraging their use. Research by University of Michigan’s Lindsey Gallo, UMichigan PhD student Kendall V. Lynch, and Rimmy E. Tomy of Chicago Booth suggests that monitors can meaningfully reduce violations of the law among the companies they inspect, but that these effects fade after the monitor departs.
The assignment of a monitor is mandated in certain nonprosecution or deferred prosecution agreements (N/DPAs), the use of which picked up following a DOJ memo in 2003. Under such an agreement, a government-appointed watchdog investigates the company’s violation, determines how to compensate affected parties, and provides recommendations to prevent future wrongdoing. Typically, the company picks up the tab for the monitor’s cost, which can run into the tens of millions of dollars, and the federal government retains the right to prosecute if the terms of the agreement are breached.
To determine the value of a corporate monitor, the researchers focused on publicly listed companies in the United States that entered into an N/DPA between 2001 and 2019. They analyzed 193 N/DPAs between the DOJ and such companies, about a third of which required the engagement of a corporate monitor. Data on the agreements came from the Corporate Prosecution Registry, a database maintained by Duke University and the University of Virginia, as well as from the DOJ and from press releases.
The research indicates that monitors were more likely to be used for companies with poor governance—as gauged by their number of independent directors—and in agreements that carried greater monetary penalties for the companies involved, which is “consistent with the placement of a Corporate Monitor when the misconduct is especially severe,” the researchers write.
A regulatory move toward transparency has broadly changed the behavior of bank monitors as well as outcomes for banks.
Banking Regulators Operate Differently under Public ScrutinyComparing companies in their sample that were assigned a monitor as part of their N/DPA with those that weren’t, and controlling for the determinants of monitor appointment, Gallo, Lynch, and Tomy find monitors decreased the likelihood of further illegal conduct by 18–25 percent. However, this benefit was only as durable as the monitors’ appointments; there’s little evidence monitors were successful in establishing lasting improvements in governance or internal procedures and controls.
To address concerns that features of the N/DPA other than the presence of a monitor may have driven outcomes, the researchers also matched the companies in their sample according to company and agreement characteristics that were likely to predict the use of a monitor, then repeated their analysis. Their findings remained largely unchanged.
In 2018, a memo issued by then Assistant Attorney General Brian Benczkowski argued for the DOJ to use monitors selectively and with a limited scope. Gallo, Lynch, and Tomy’s findings suggest that such monitors may be able to play a role in reducing violations of the law in the short run—but that keeping companies from misbehaving while under scrutiny is significantly easier than instituting long-term change. Overall, Tomy says, findings from the study highlight the need for greater transparency and accountability around the use of corporate monitors.
Lindsey Gallo, Kendall V. Lynch, and Rimmy E. Tomy, “Out of Site, Out of Mind? The Role of the Government-Appointed Corporate Monitor,” Working paper, March 2021.
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